Utilities:

How should utilities invest capital right now to improve grid resiliency, reliability and fuel diversity? During today's OnPoint, Ralph Izzo, chairman and CEO of Public Service Enterprise Group, discusses his company's proposal for building grid resiliency -- and talks about PSEG's outlook for fuel supply investments. He also explains why he believes distributed generation should be a secondary option for consumers as his utility's business model rapidly evolves.

Transcript

Monica Trauzzi: Hello and welcome to OnPoint. I'm Monica Trauzzi. With me today is Ralph Izzo, chairman and CEO of PSEG. Ralph, thank you so much for coming back on the show.

Monica Trauzzi: Ralph, the Northeast has experienced unusually severe weather recently, which has raised many questions about grid reliability in the region. How much of a threat is extreme weather to utility infrastructure, and what have you identified as the key ways to approach this grid resiliency issue?

Ralph Izzo: So most of the grid reliability issues we've experienced have been with extreme weather events like a Sandy or a Hurricane Irene, less so like a polar vortex, which didn't really affect the grid from the point of view of the wires. So what we've been saying to regulators is that we need to make the system a bit more redundant so that we can feed customers from more than one direction, and we need to harden the system. That's really nothing more than lifting some equipment off the ground, putting flood protection around substations. We call it an energy-strong proposal, which is really to design the grid for the recognition of two things: No. 1, increased reliance on electricity by our customers, and No. 2, more extreme weather.

Monica Trauzzi: It's expensive, though. We're talking about $3.9 billion, and that means that ratepayers will be seeing an impact on their bills.

Ralph Izzo: That's correct. So it's $3.9 billion over 10 years, $2.6 billion over five years. We have a set of circumstances, however, that makes it ripe to be done now. We have lower interest rates. We have low natural gas costs, which we're passing on directly, those savings, to our customers. Low natural gas is reducing the price of electricity. And quite candidly we have labor that's available to do the work. So now is the time to make those investments for those reasons.

Monica Trauzzi: There is some push-back, though, on this project. Some folks think that only 61 percent of the outages that are currently occurring will still occur -- I shouldn't say only, but 61 percent will still occur. So how do you make the case to ratepayers if not all of them will see a benefit to the investments that they will all have to make?

Ralph Izzo: Well, so what we've said to folks is, "Look, we want to fix those substations and strengthen those substations that were underwater." So those were 29 substations that were affected by Irene and Sandy. And then we said to them, "We understand why these 60 substations that FEMA has redrawn the maps and said they are under increased risk -- we shouldn't tackle them just yet." And that would be marching toward 100 percent coverage. No system will be perfect to guarantee that no customer will be interrupted. But to the extent that my power stayed on but I couldn't gain access to my school because their power went off, then I will benefit from this as well.

So you can never get a perfect protection against nasty storms. We're simply suggesting that we protect those areas that we know have been impacted in the past, and then think in the future about those areas that we predict might be affected but haven't had it happen yet.

Monica Trauzzi: Many utilities are making transmission investments right now. Do you think that transmission is the safest place for utilities to be investing capital at this point?

Ralph Izzo: Well, safe is a relative term. It's a wise investment. Everything I just mentioned up until now was at the distribution level. We have had a very robust program in transmission that does improve the reliability of the bulk power system. That doesn't guarantee the reliability at the distribution center, which was affected more so than transmission with some of those major storms that I just described a second ago. We do think that transmission is an important place to put our dollars because the FERC regulatory system is a more predictable one that helps us be able to plan over the long term. And planning over the long term means having in place the people -- the engineers, the designers, the construction crews -- so that we know that we can deploy them on a regular and consistent basis and not start, stop, start, stop.

Monica Trauzzi: So does Order 1000 sort of help bring that consistency?

Ralph Izzo: No, actually I think Order 1000 is a bit of a problem. There's this attraction -- I am a huge fan of free markets, and there is this attraction to kind of the creative solutions that people might offer in a competitive FERC Order 1000 world. But there are some downsides that are associated with that in terms of where does one asset begin and where does one asset end? Who has the property rights to right of ways? Do we want people to use existing right of ways, and how do they get compensated for that? Do we want to create whole new right of ways? How do we decide whether or not a project meets all of the expansion requirements that may occur after meeting this particular reliability constraint? So there are a whole host of questions that are coming up in a FERC Order 1000 world that we haven't had to grapple with in the past that may not serve the customers' long-term interests.

Monica Trauzzi: Do efficiency improvements influence the way you invest money?

Ralph Izzo: They don't to the extent that I'd like them to. Just a simple example, Monica -- we've spent last year $1.6 billion on transmission. Over the past three years we've spent $1 billion on solar. Over that same time frame we've spent $300 million on energy efficiency. And it's a failure of our regulatory system. Somewhere, somehow, over the past century we decided that utilities' asset base stopped at the meter, and we have left it to the customer to decide what's the most efficient water heater, what's the most efficient lighting system, what's the most efficient air conditioning system -- not exactly consumer products that excite folks when they have to go out shopping. I think we have to redefine the utility of the future to say, "No, you have to provide energy services on the other side of the meter in a way that lowers the customer's bill," and I think we can do that better than it's been done in the past.

Monica Trauzzi: All right, let's talk about distributed generation then, because that has a lot to do with consumer choice.

Ralph Izzo: Right, right.

Monica Trauzzi: It's a big debate. Net metering is a big debate and controversy in many regions of the country. What do you think distributed generation's role should be for your customers?

Ralph Izzo: So I think it should be their second choice. There's no question that networks are a highly economically efficient system. Nobody wants to be on Facebook if they're the only user; that's not the most efficient way to build a network. The telephone system was built on the assumption that many people would be interconnected. So the same is true of the bulk power system. It's interconnecting different sources of supply to make sure the most efficient economy of scale is delivered to the small user, so small users bundled together connecting to a network to benefit from the economy of scale of central station power.

Let's keep that in place while we focus on having those users use less energy. So rather than having them think about how they can self-supply, let's think about how they can use less supply. And that's what I complain about in that when people think about utility 2.0, the next generation, they think of this distributed generation and smart grids and microgrids. Let's think about needing it less, period, and focus our energy there.

Monica Trauzzi: But isn't that diversity what is coming, what the future of the utility business model is?

Ralph Izzo: Only because of regulatory facades, right? I mean, net metering is a regulatory saying to somebody who wants to self-generate, "Don't worry about the fact that storage is not economic. Instead of forcing you to store electricity in batteries, we'll allow you to store dollars in your bank account by paying you the retail rate, and then you can pay for the electricity later on." Well, who gets to do that? People with high disposable income who can afford the economically inefficient distributed generation. Who's paying for that? People who can't afford to do it.

Monica Trauzzi: So you don't feel that you'll be left in the dust if you don't fully jump on the DG bandwagon?

Ralph Izzo: No, I don't. I think that we will be left in the dust if we don't preserve universal access to the kind of benefits that a utility can bring end-users in the form of energy efficiency. Now that doesn't mean that we should shut down renewables programs. I do think that over time those technologies will become more cost-competitive and we should as a nation not be left behind. But to subsidize them to the extent that we have where we have production tax credits encouraging wind to produce at negative prices so that we then shut off carbon-free nuclear power and replace it with carbon-intensive gas and coal? So we just have to be careful that the economic signals we sent are not so disruptive as to have unintended consequences.

Monica Trauzzi: So it's pretty clear that the utility business model is rapidly evolving. What do you think PSEG's model will look like in 10 years?

Ralph Izzo: So I would like to see us expand way beyond the meter to be someone who provides energy services that help customers lower their bills, first and foremost. Secondly, to the extent that people still require electricity -- because even though you use less of it, you still will require it -- we're the most reliable provider of that electricity possible. And then in those niche areas where it makes sense to separate people from the grid because of proximity to the natural resource, be that wind, be that solar, be that a customer load that can benefit from a microgrid, that we provide those services as well. But to think that that's going to be ubiquitous, that everyone could use solar or everyone could use wind or everyone should be part of their own microgrid, I think is probably not realistic.

Monica Trauzzi: All right, Ralph, very interesting perspective. Thank you for coming on the show.

Ralph Izzo: My pleasure. Thank you for having me.

Monica Trauzzi: And thanks for watching. We'll see you back here tomorrow.